LEGISLATIVE COUNSEL'S DIGEST

The California Constitution requires members of the retirement board of a public pension or retirement system to discharge their duties with respect to the system solely in the interest of, and for the exclusive purposes of providing benefits to, participants and their beneficiaries, minimizing employer contributions thereto, and defraying reasonable expenses of administering the system. Existing statutory law establishes various public employee retirement systems and provides for the administration of the State Teachers’ Retirement System by the Teachers’ Retirement Board and for the administration of the Public Employees’ Retirement System, among other public employee retirement systems, by the Board of Administration of the Public Employees’ Retirement System.

This bill, on and after January 1, 2019,
bill would require those boards to consider the
financial climate risk, as defined, of each investment, or potential investment, as part of their discharge of their fiduciary duties with respect to the investment. in their management of any funds they administer. The bill, by January 1, 2020, and annually thereafter, would require the boards to report on include in their comprehensive annual financial reports the financial climate risks of their investments, including the carbon footprint of the investments,
alignment of their portfolios with a specified climate agreement and California climate policy goals, the value at risk if these goals are achieved, and the exposure of the portfolios to long-term risks, as specified. The bill would provide that it does not require the boards to take action that is not consistent with their fiduciary responsibilities. The bill would make related legislative findings and declarations.

Digest Key

Vote:
MAJORITY
Appropriation:
NO
Fiscal Committee:
YES
Local Program:
NO

Bill Text

The people of the State of California do enact as follows:

SECTION 1.

The Legislature finds and declares as follows:

(a) Climate change is a long-term problem that will affect our environment, health, and economy for decades to come.

(b) Effects of global climate change that scientists predicted in the past are already occurring – sea ice has been lost, sea levels are rising at accelerated rates, and longer, more intense heat waves and extreme weather events are occurring.

(c) As global temperatures to continue to rise, these
effects will likely accelerate. Heat waves, droughts, and hurricanes are all projected to grow in both frequency and intensity as climate change
progresses.

(d) The financial sector is not insulated from the adverse effects of climate change.

(e) California is a global leader in addressing climate change and has consistently striven to protect the physical, social, and economic resources of all Californians, as most recently exemplified by the passage of Senate Bills 32 and 350 of the 2015–16 Regular Session.

(f) Climate change presents an array of material financial risks, including transition risk, physical risk, and litigation risk, that reasonable investors must take into account when making investment decisions. Failure to acknowledge and address
these risks will result in exposure to subsequent liabilities and financial risk.

(g) If global temperature rise is to be limited to no more than 2 degrees Celsius, or the aspirational target of 1.5 degrees proposed in the COP 21 agreement now in effect, governments must act to limit warming and hasten the transition to a low-carbon economy by halting the extraction and development of carbon reserves. This regulatory risk will affect major sectors of the global economy.

(h) In the retirement system context, these risks are especially salient. Retirement boards are duty-bound have the fiduciary duty to administer
retirement funds solely in the interest of system participants and their beneficiaries. In order to meet this requirement and ensure sufficient funding of both current and future retirees’ financial benefits, retirement boards must consider both short-term and long-term effects and risks of retirement fund investments.

(i) If climate change and carbon emissions continue on their current trajectories, both acute and chronic weather-related activity will greatly compromise the ability of businesses that do not account for these changes to reliably generate returns. Pension funds’ influence in the markets can induce firms to accurately report their carbon risk to the public.

(j) Given
the potentially catastrophic consequences of climate change, the documented social and economic cost of carbon, and the emerging body of literature on the material financial risks of climate change, retirement boards simply cannot disregard financial climate risks.

(k) Governance directives of California’s largest pension funds, the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) advise the funds’ boards to take climate risk, among other risks, into account when making investment decisions. These directives include CalPERS Investment Belief 9 and CalSTRS “Environmental” Risk Factor.

(l) This bill would ensure that future boards will continue to consider financial climate risk in investment decisions.

SEC. 2.

Section 7510.5 is added to the Government Code, to read:

7510.5.

(a) For purposes of this section, the following definitions apply:

(1) “Board” means the Board of Administration of the Public Employees’ Retirement System or the Teachers’ Retirement Board.

(b) On and after January 1, 2019, the The board shall consider the financial climate risk of each investment, or potential investment, as part of the board’s discharge of its fiduciary duties with respect to the investment. in its management of any fund it administers, including when making decisions regarding the fund’s asset allocation; increasing, decreasing, or maintaining investments in individual companies or commingled funds; or
hiring external asset managers.

(c) By January 1, 2020, and annually thereafter, the board shall report on include in its comprehensive annual financial reports, the financial climate risks of its investments, including the carbon footprint of the investments computed using the Greenhouse Gas Protocol of the World Resources Institute, including Scope 3. alignment of the board’s portfolio with the Paris climate agreement and California climate policy goals, the value at risk if these goals are achieved, and the
exposure of the portfolio to long-term risks.

(d) The board shall include in the reports pursuant to subdivision (c) the methods and results of the board’s engagement related to environmental factors with companies that are the most carbon intense, such as utilities, oil, and gas producers, within the portfolio. This component of the reports shall include both of the following:

(1) A summary of investments in which the board has engaged corporate management to seek information and understanding of the corporate decisions and their ramifications on environmental factors.

(2) A description of additional
action taken, or planned to be taken, by the board to address the investment’s environmental risk, including a list of proxy votes and shareholder proposals initiated by the board.

(e) Nothing in this section shall require the board to take action that is not consistent with the fiduciary responsibilities of the board as described in Section 17 of Article XVI of the California Constitution.